2020 Global Outlook: Testing limits

Rethinking resilience

  • Sources: BlackRock Investment Institute and U.S. Bureau of Labor Statistics, with data from Refinitiv Datastream, January 2020. Notes: This chart shows the annual change in the Employee Cost Index and the annual change of various implied components relative to their respective means from 1996-2019. The decomposition is similar to that done by former Fed Chair Janet Yellen in a September 2015 speech.

  • Our preference for U.S. Treasuries and Treasury Inflation-Protected Securities as portfolio ballast has worked during the recent virus-related equity volatility. The moves also confirmed that some developed market government bonds, such as German bunds, offer less diversification with yields near levels we consider to be their lower bounds.
  • The coronavirus outbreak adds to global trade tensions as a reason for companies to consider diversifying their global supply chains. The disruptions could add to price pressures that are already building in the U.S., as the chart above shows. We see a case for substituting some nominal government bond exposures for U.S. Treasury Inflation-Protected Securities (TIPS) in strategic allocations as a source of resilience against inflation surprises.
  • A weakening or breakdown of the negative correlation between returns of stocks and bonds could undermine the portfolio ballast role of government bonds.
  • A focus on sustainability can help make portfolios more resilient. We believe the adoption of sustainable investing is a new phenomenon that will carry a return advantage over years and decades.
  • Geopolitical tensions remain high in the Middle East, and we believe markets are underestimating cyber security risks ahead of the U.S. election. See our geopolitical risk dashboard.

Bottom line: Low government bond yields and underappreciated inflation risks require a rethink of the role of government bonds as portfolio ballast, especially outside the U.S.

Meet the authors
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee. He is also Chairman of the Financial Markets Advisory (FMA
Jean Boivin
Jean Boivin
Head of BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is the Head of the BlackRock Investment Institute (BII). The institute leverages BlackRock’s expertise and produces proprietary ...
Elga Bartsch
Elga Bartsch
Managing Director, Head of Macro Research of the BlackRock Investment Institute
Elga Bartsch, Managing Director, is Head of Macro Research of the BlackRock Investment Institute. Elga heads up economic and markets research of the Blackrock Investment ...
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Scott Thiel
Scott Thiel
Chief Fixed Income Strategist
Scott Thiel, Managing Director, is Chief Fixed Income Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). He is responsible for developing ...